[5] following 5 years after that. As a result, 50 percent vesting is required. after 10 years of participation, and 100 percent vesting after 15 years of participation. In addition, an individual who becomes a participant in a qualified plan is permitted to count up to 5 years of preparticipation service for purposes of determining his vesting percentage.

The vesting percentages required under the committee bill are applied to all benefits accrued during the period of participation in the plan, regardless of whether such benefits accrued prior to the effective date of the provision or on or after this date.

To give plans time to adjust to the new minimum vesting requirement, the effective date of the minimum vesting standard is deferred to January 1, 1976, for plans in existence on the date of enactment of the legislation. However, in the case of plans adopted after enactment of the legislation (which will have been adopted with knowledge of the new requirement), the provision is effective for plan years. beginning after the date of enactment. Also, where existing qualified plans were the subject of collective bargaining, the minimum vesting standard will not apply until the present collective bargaining agreement terminates-or 1981, whichever is sooner.

Existing plans which provide for full 100 percent vesting no later than at the end of 10 years of covered service will be exempt from compliance with the new vesting standard until 1981.

3. Minimum funding standards.-The new funding standard not only requires the contributions to qualified plans which provide defined benefits to be sufficient to pay costs attributable to the current operations of the plan (as does present law), but also requires the contributions to be sufficient to amortize the initial unfunded past service liabilities in level payments over a period of 30 years or less, instead of merely providing that the contributions be sufficient to meet the interest payments on such unfunded liabilities, as under present law. Past service costs arising as a result of plan amendments, which increase unfunded past service costs by at least 5 percent, are to be funded in the same way as past service costs under new plansnamely, in level amounts over a period of 30 years or less.

The new funding standard requires amortization of all accrued past service liabilities (i.e., both vested past service liabilities and those past service liabilities which are expected to vest in the future).

Experience deficiencies (which arise when the actual plan costs turn out to be greater than were previously estimated on the basis of the actuarial assumptions-for instance, when the value of the plan assets is less than was expected) are to be funded over a period of 15 years or the average remaining working life of the covered employees whichever is the shorter period. Similarly, experience gains (i.e., gains which are attributable to a favorable variation in actual experience compared to the actuarial assumptions) are to be taken into account over the same period as actuarial deficiencies—that is, over the shorter of 15 years or the average remaining working life of the employees. Also, to minimize the creation of experience gains or experience deficiencies the assets of pension plans are to be valued on the basis of a moving average of 5 or fewer years.

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Employers are required to contribute to profit-sharing, stock bonus, and money purchase pension plans any amounts that they have agreed to contribute. However, with this exception, such plans are not required to comply with any specific funding standard.

The Service is given the authority to waive the minimum funding requirement in cases involving financial hardship to the employer, but the waived contribution must be made up in level payments over the next 10 years. To avoid the indefinite postponement of the fulfillment of the funding standards, not more than 5 such waivers may be granted in a 10-year period.

Where the minimum funding standards result in an increase in annual cost of 10 percent or more for collectively bargained multiemployer plans and would cause substantial hardship, the Service can allow already existing past service costs to be funded over a period longer than 30 years (up to 45 years).

Qualified Federal, State, and local pension plans continue to be subject to present funding requirements instead of to the new funding requirements under the bill.

If an employer fails to contribute sufficient amounts to meet the new funding requirements, he will be subject to a nondeductible 5 percent excise tax per year on the amount of the underfunding for any year. If the employer fails to make up the underfunding by 90 days after original notification by the Internal Revenue Service, then unless the Service has granted an extension of time, the employer is subject to a second level excise tax amounting to 100 percent of the underfunding. In the case of plans adopted after the legislation is adopted, the new funding requirements are effective for plan years beginning after the date of enactment. However, these funding standards do not apply until January 1, 1976, for plans in existence on the date of enactment in order to give such plans time to adjust. Existing plans which have been subject to collective bargaining agreements are not subject to the new standard until the expiration of the collective bargaining agreement or 1981, whichever is sooner.

4. Portability.-The Pension Benefit Guaranty Corporation, established to administer the termination insurance program, is also authorized to establish a central portability fund to receive deposits of sums representing an employee's vested rights when he is separated from a firm prior to reaching retirement age. The employee's interest in the portability fund can then either be transferred to his next employer's qualified plan or retained in the portability fund until he retires, when it would either be paid out to him or used to purchase an annuity from an insurance company for him.

The portability fund is authorized to receive transfers of amounts representing the interest of employees under qualified plans where they have terminated their employment with the firm. (However amounts accumulated in H.R. 10 plans by self-employed persons, in corporate plans by proprietary employers, and in individual retirement plans are not eligible for transfer to the portability fund.)

The payments made out of this central portability fund to the employee or his beneficiaries will generally be taxed in the same manner as payments made by qualified plans. However, the bill specifically

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provides that the transfer of amounts representing the employee's interest in a pension plan to the central portability fund and transfers from the central portability fund to the plan of a new employer are not to give rise to tax liability.

The transfer of amounts representing vested rights to benefits to or from the central portability fund is entirely voluntary. In order for such transfers to take place, both the employee and the private pension plans concerned with the transfer will have to give their agree

ment.

Moreover, the bill generally permits the voluntary transfer of sums of money representing an employee's vested rights from one qualified plan to another directly without the use of the central portability fund. The tax laws are amended to make it clear that such voluntary transfers are to be nontaxable, subject to specified conditions designed to prevent abuses.

Finally, to insure that employees will actually receive the plan benefits to which they are entitled when they retire, the Social Security Administration will keep records regarding the vested rights of employees which will be reported by employers at the time that employees terminate their employment. The Social Security Administration will then furnish this information regarding vested rights to individuals both on request and at the same time that official information is supplied regarding social security benefits.

5. Plan termination insurance.-A corporation (The Pension Benefit Guaranty Corporation, with the Secretaries of Labor, Commerce, and Treasury as trustees and the Secretary of Treasury as managing trustee) is established to insure employees against the loss of pension benefits resulting from defined benefit plan terminations.

The insurance under the program is limited to the vested benefit provided under the plan, up to 50 percent of the average monthly wage in the highest 5 years but not more than $750 a month. The $750 figure will be adusted upward as the social security wage base is increased. The insurance applies to vested benefits earned prior to as well as on and subsequent to the effective date of the Act.

In the event of plan termination, the assets of the plan must be used to pay the plan liabilities. Employers are generally made liable for 10 percent of the losses due to plan termination (i.e., amounts which the plan cannot pay out of its assets) up to 50 percent of their net worth. However, this liability is subordinated to amounts owed general creditors. In addition, employers are given the option of eliminating employer liability in certain circumstances under the plan termination insurance by paying an increased annual premium tax for the plan. During the first 3 years after the effective date of the provision (January 1, 1975), if there is employer liability, the employer pays an annual premium tax of 50 cents for each participant in the pension plan who is covered by the insurance in order to finance the plan. However, if the employer agrees to pay an annual premium tax of 70 cents per covered employee, employer liability is eliminated except where the employer remains in business after the plan is terminated or when the plan termination involves a merger or reorganization.

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The premium taxes will be paid for a minimum of 3 years before any benefits are paid out. This will give the insurance program time to accumulate funds with which to make payments and also to gain experience as to the level and types of premiums that can best fund the insurance program. After the initial 3-year period, the Pension Benefit Guaranty Corporation may recommend different premium tax levels for individual employer and multiemployer plans to reflect the different risk of termination under these two different kinds of plans. Any premium tax changes made must be approved by Congress.

6. Fiduciary responsibility.-Fiduciaries are required to discharge their duties solely in the interest of participants and their beneficiaries and in a manner which will not jeopardize the income or assets of the fund. They are also specifically prohibited from engaging in actions where there would be a conflict of interest with the fund, such as representing any other party dealing with the fund. Any fiduciary who breaches any of the responsibilities imposed on him by the committee provision is personally liable to make good to the plan any losses resulting from his failure to comply with the fiduciary standards. To enforce these obligations, the Secretary of Labor or a participant or beneficiary of a plan is authorized to bring a civil action in the courts for appropriate relief to redress or restrain any violation of the fiduciary standards.

In addition, parties in interest and fiduciaries who engage in specified prohibited transactions involving self-dealing are to be subject to a two-level excise tax on the amount involved in the prohibited transaction. The first level tax generally will be 5 percent (per year) of the amount involved; if the transaction is not corrected to make the trust whole, a second level tax of 100 percent will be imposed. (In the case of a fiduciary, the first level tax is 2.5 percent and the second level tax is 50 percent of the amount involved, up to a maximum of $10,000 at each level.) None of these taxes is deductible.

To protect the rights of covered employees, qualified pension plans are prohibited from investing in the securities of the employer after August 21, 1973. However, pension plans are permitted to retain indefinitely employer securities purchased before this date.

The bill generally places no restriction on the purchase of employer securities by profit-sharing and stock bonus plans. However, where the employer securities are not readily tradable on an established securities market, the bill limits the investment in employer securities by profit-sharing plans to 10 percent of their assets.

7. Enforcement.-To aid in enforcement, the committee bill provides for the establishment by the Internal Revenue Service of a separate office headed by an Assistant Commissioner of Internal Revenue to deal primarily with employee benefit plans and organizations exempt from tax under section 501 (a) of the Internal Revenue Code, including religious, charitable, and educational organizations. In order to fund this new office, the bill authorizes appropriations equal to the sum of (1) a new tax of $1 per participant per year in a qualified plan and (2) one-half of the revenue raised by the present 4 percent excise tax on private foundations.

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In addition, to provide additional opportunities for redress in case of disagreement with the decisions of the Internal Revenue Service on pension matters, both employees and employers will be allowed to appeal determination letters issued by the Internal Revenue Service to the Tax Court after exhausting their remedies under the Internal Revenue Service administrative procedures. Employees are also given the right to submit disputes with pension plan administrators to the Labor Department for decision.

8. Equal tax treatment under qualified plans. To provide more equitable tax treatment under qualified plans, the committee has provided the following three changes which should be regarded as one package in the sense that all three changes must be adopted to achieve the desired equity objectives.

A. Any individual (including an employee or a self-employed individual) who is not a participant in a qualified retirement plan or governmental plan may take tax deductions of up to $1,000 a year for amounts of earned income set aside for his own retirement. Alternatively, the employer of any individual who establishes such a personal retirement plan is allowed to make tax deductible contributions to the individual retirement account on behalf of the employee (which will not be currently taxable to the employee) so long as the sum of the employee's own contribution and the employer's contribution do not exceed $1,000. The contributions to the individual retirement plans can be invested in a wide range of investments, including special government savings bonds which would be issued for this purpose, annuity contracts sold by insurance companies, mutual funds, stocks, and savings accounts under custodial arrangements.

B. The maximum deductible contributions a self-employed individual is allowed to make on his own behalf to a qualified plan (H.R. 10 plan) are increased to 15 percent of earned income up to $7,500 a year (or the equivalent in benefit levels, in the case of fixed benefit plans). In addition, the bill limits to no more than $100,000 the portion of a self-employed person's income which may be taken into account for this purpose. This gives assurance that a self-employed individual will provide a set-aside of at least 7.5 percent for his employees if he is to take the maximum deduction of $7,500 for himself.

C. After careful consideration, the committee has concluded that the basic situation of certain proprietary-employees of closely-held corporations is so similar to that of self-employed people that they should generally be treated like self-employed people for pension purposes. The fact that there is no specific limit on the plan contributions for corporate proprietary-employees has led to abuses and charges of discrimination against the self-employed. To remedy this, contributions on behalf of corporate proprietary-employees who (1) own at least 2 percent of the stock and (2) together account for at least 25 percent of the accrued benefits of all employees under the plan are limited to exactly the same deduction limitations as apply to selfemployed people-namely, 15 percent of earned income with a maximum annual ceiling of $7,500 (or the equivalent in benefit levels, in the case of fixed benefit plans). As in the case of self-employed people, the